PEP: Income Statement Analysis for the June 2009 Quarter

PepsiCo, Inc., (NYSE: PEP) earned $1.06 per share in the 12 weeks that ended 13 June, up from $1.05 last year.  This post examines the Income Statement and compares the figures on it to our "look-ahead" estimates.

In a follow-up post, we will move beyond the Income Statement and report PepsiCo's scores as measured by the GCFR Financial Gauges.  We will provide the latest figures for the various financial metrics we use to analyze PepsiCo's Cash Management, Growth, Profitability and Value.

Our principal sources were the earnings announcement, the 10-Q for the quarter, and the Seeking Alpha conference call transcript.  Some background information about PepsiCo and the business environment in which it is currently operating can be found in the look-ahead.

These sources did not disclose any new information about PepsiCo's April 2009 offer to buy the shares it does not already own in Pepsi Bottling Group, Inc. (NYSE: PBG) and PepsiAmericas, Inc., (NYSE: PAS).  At the time the offer was made, PepsiCo owned about 33 percent of Pepsi Bottling Group and 43 percent of PepsiAmericas, which are its two largest bottlers.


Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.







Revenue in the second quarter, on a GAAP basis, was 3.2 percent less than in the year-earlier period.  We had expected a decline of only 0.5 percent.  However, we can't be too disappointed because PepsiCo reported that Revenue increased 5.5 percent if currency exchange rate fluctuations are ignored.

Exchange rates can have a significant effect on PepsiCo's results because the company has extensive non-U.S. operations.

Frito-Lay North America is the PepsiCo division in which Revenue increased the most, 6.4 percent, in the June quarter.  The division focusing on Europe suffered the greatest Revenue decline, 10.6 percent.  Revenue fell by more than 9 percent at Latin America Foods and PepsiCo Americas Beverages.

The Cost of Goods Sold in the quarter equaled 46.1 percent of Revenue, which translates into a Gross Margin of 53.9 percent.  The Gross Margin was a little better than last year's 53.6 percent, but we thought it would reach a more profitable 54.3 percent.

Sales, General, and Administrative (SG&A) expenses were 33.1 percent of Revenue, nearly a full point less than our 34-percent estimate.  In the June 2008 quarter, these expenses were 33.4 percent.

The charge for amortization of intangible assets was consistent with our expectations.

The lower-than-anticipated SG&A charges compensated for the weaker Revenue and Gross Margin.  As a result, Operating Income was a mere $6 million below our target.  Operating Income was also essentially identical to its value in last year's second quarter.

FLNA contributed more than to Operating Income than any other division, but Operating Income increased the most on a percentage basis at the Asia, Mid East, and Africa division.  Operating Income was down more than 9 percent in both Europe and PAB.  The drop was probably exacerbated by currency swings.

We rarely do well at predicting the erratic "Bottler equity income," and this quarter was no exception.  Our target was income of $25 million, and the actual figure was a much more profitable $119 million. 

The Net Interest Expense was $37 million less than we expected.  However, interest expenses doubled from last year because the company now has more debt.

The Income Tax Rate was 25.4 percent, down from 26.6 percent in the year-earlier quarter.  We expected a tax rate of 26 percent.  

Net Income in the quarter was 2.3 percent below that in the year-earlier period.  However, better-than-expected equity income and the lower tax rate enabled Net Income to exceed our prediction by 6.3 percent.  Earnings per share were up slightly because fewer shares were outstanding.



Full disclosure: Long PEP at time of writing.

AAPL: Gauge Scores for the June 2009 Quarter

In a recent post, we examined Apple's (NASDAQ: AAPL) Income Statement for the quarter that ended 27 June 2009.  Surpassing most predictions, Apple's earnings increased from $1.19 to $1.35 per diluted share. 

We have since used Apple's latest financial statements to update the ratios and other metrics with which we assess Cash Management, Growth, Profitability and Value.  This post reports on our analysis results, including the Financial Gauge scores.

In summary, Apple's GCFR gauge scores are as follows:

• Cash Management: 13 of 25 (down from 14 in March)
• Growth: 10 of 25 (down from 11)
• Profitability: 13 of 25 (unchanged)
• Value: 11 of 25 (down from 18)

• Overall: 48 of 100 (down from 60)

The rest of this post reviews the financial metrics that determine the gauge scores.

Cash Management	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Current Ratio	2.1	2.5	3.0	2.6
LTD/Equity	0.0%	0.0%	0.0%	0.0%
Debt/CFO (years)	0.0	0.0	0.0	0.0
Inventory/CGS (days)	7.6	5.6	7.2	6.1
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	22.6	19.1	17.9	21.7
Working Capital/Invested Capital (*)	71.5%	82.7%	95.7%	86.7%
Cash Conversion Cycle Time (days)	-40.2	-43.3	-40.0	-42.9
Gauge Score (0 to 25)	13	14	17	16

* For Apple we use Shareholder's Equity instead of Invested Capital

Apple's strong Balance Sheet features zero debt and $24 billion in Cash and Short-term Investments.  Current Liabilities have leaped substantially, which reduces the Current Ratio shown above.  However, Deferred Revenue is responsible for the lion's share of additional liabilities, and this is due to the subscription accounting -- explained clearly by Andy Zaky at Bullish Cross -- used by Apple for sales of the iPhone and some other products. 

The days of Inventory held, which is amazingly low, has inched up a little.

There are a few ways to calculate Invested Capital, and the equation we use is:

    Invested Capital = Shareholders' Equity + Debt - Cash - Short-Term Investments

In many recent quarters, this equation has produces a negative number for Apple, although it is now modestly positive.  To avoid this difficulty, we substitute Equity for Invested Capital.  Changes from quarter to quarter are more important to us than the absolute figure for Capital, but we would be interested to learn how others calculate Apple's Invested Capital.

Although the concept of negative days in the Cash Conversion Cycle Time might be a little troubling, we accept it with the belief that lower numbers (or more negative numbers) cannot help but indicate better cash management efficiency.

Growth	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Revenue growth	12.2%	17.2%	36.1%	29.8%
Revenue/Assets	86.6%	91.4%	115.5%	121.9%
Operating Profit growth	46.3%	48.1%	71.8%	59.3%
CFO growth	62.1%	50.6%	44.9%	71.5%
Net Income growth	12.5%	15.4%	46.8%	62.5%
Gauge Score (0 to 25)	10	11	14	16

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

While Apple's growth rates have started to moderate from last year's red-hot pace, they remain impressive -- especially so given current economic conditions.  Apple's focus on the consumer has paid dividends, and IT spending by businesses has been weaker.

Profitability	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Operating Expenses/Revenue	80.0%	80.3%	80.9%	84.0%
ROIC (*)	21.4%	22.1%	25.1%	21.4%
Free Cash Flow/Invested Capital (*)	45.1%	43.7%	37.0%	33.8%
Accrual Ratio	19.7%	23.8%	10.7%	9.9%
Gauge Score (0 to 25)	13	13	18	16

* For Apple we use Shareholder's Equity instead of Invested Capital

We're impressed with Apple's success at keeping its costs down and margin high.  The returns (income and cash flow) on Equity are superb.  The Accrual Ratio is oddly high, which would ordinarily raise a concern about earnings quality.  However, this appears to be an artifact of the a change, put into effect during the December 2008 quarter, in how the company accounts for fixed income securities.

Value	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
P/E	25.0	18.9	32.9	33.6
P/E vs. S&P 500 P/E	1.1	1.0	1.8	2.0
PEG	0.5	0.4	0.5	0.3
Price/Revenue	3.7	2.8	4.9	3.6
Enterprise Value/Cash Flow (EV/CFO)	9.3	6.7	18.6	16.0
Gauge Score (0 to 25)	11	18	3	8

Apple's share price skyrocketed from $105 to $142 during the second quarter of 2009, and this increase put a lot of downward pressure on the Value gauge.  However, the company's fine operating performance kept the score from declining further.  When compared to the last five years, some figures suggest the company's shares have become less expensive.

Overall	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Gauge Score (0 to 100)	48	60	46	52

This is the first GCFR gauge analysis of Apple.  The company's results in the June quarter did not have much of an effect on three of the four category gauges.  The Value gauge, however, sagged in response to the soaring price of Apple's common shares.  The drop in this gauge, which is double-weighted, was responsible for most of the Overall Gauge's decline.

If the shares were undervalued earlier in the year, which would seem to have been the case given the healthy (but retroactive) 60-point score and the subsequent Spring rally, our gauges are signaling that the shares are less undervalued even after the better-than-expected quarter.


Full disclosure: No position in AAPL at time of writing.

AAPL: Income Statement Analysis for the June 2009 Quarter

Apple (NASDAQ: AAPL) earned $1.35 per diluted share in the quarter that ended 27 June 2009, surpassing most predictions and up from $1.19 last year.  This period was the third quarter of Apple's fiscal year, which ends in September.

Earlier today, the Apple 2.0 blog summarized the pre-announcement expectations of professional and amateur analysts:

The consensus, as reported by Thomson Financial, has been inching up and stands this morning at $1.17 earnings per share on revenue of $8.2 billion. As usual, the unaffiliated analysts — a ragtag group of bloggers, day traders and amateur analysts who track the stock as closely, if not more so, than the professionals — are considerably more bullish, predicting earnings in the $1.27 – $1.35 range.

[emphasis added]

This post, which is our first on Apple, takes a peek at the company's latest Income Statement.  In a second article, we will report Apple's scores as measured by the GCFR Financial Gauges.  The follow-up post will provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

For the benefit of any Luddites that might stumble onto a hardcopy of this post, we will note that Apple Inc., according to the company's last 10-K,  is in business to:

... design, manufacture, and market personal computers, portable digital music players, and mobile communication devices and sell a variety of related software, services, peripherals, and networking solutions. ...

In addition, the Company sells a variety of third-party Macintosh® (“Mac”), iPod® and iPhone™ compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores, and digital content through the iTunes Store®.

The company is known for elegant product design, innovation, the loyalty of its customers, and the cult-like status afforded cofounder, CEO, and savior) Steve Jobs.

Apple is one of the top-five seller of personal computers in the U.S.  Figures from different industry analysts are inconsistent, but Chris Foresman at ars technica has done a good job sorting out the most-recent market share numbers.


Please click here to see a full-sized, normalized depiction of the actual results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.






Apple's Revenue in the June quarter was 11.7 percent more than last year, and it was up 2.1 percent from the March 2009 period.  Revenue from Macintosh desktops and portables fell 7.8 percent from June 2008, even though 13 percent more portables were sold (at lower average prices).   The Mac product mix tilted toward lower-price models due to the effect of the weak economy on businesses.

iPhones were the real star of the quarter, contributing 300 percent more to Revenue than in the comparable period last year.  iPhones were responsible for 20 percent of total Revenue in the most recent quarter.  Sales might have been even higher if supplies had not been constrained.

Revenue growth was especially strong in Europe, where sales increased 22 percent from last year's June quarter.

The Cost of Goods Sold was 63.7 percent of Revenue in the quarter, which translates into a Gross Margin of 36.3 percent, up from 34.8 percent in June 2008.  The Gross Margin exceeded prior guidance from Apple, and it was consistent with the 35 to 37 percent range cited by the more optimistic followers of the the company. 

Evidently, the lucrative iPhone more than makes up for both declining margins (after recent price cuts) on Apple's other products and rising component costs.

A nice article on predicting Apple's Gross Margin, which cites the deservedly well-respected Financial Alchemist, can be found here.

Research and Development (R&D) expenses were 4.1 percent of Revenue, which was a bit more than the 3.9 percent in last year's second quarter.

On the other hand, Sales, General, and Administrative (SG&A) expenses decreased slightly from 12.3 percent of Revenue last year to 12.1 percent.

The quarter did not include any separately identified "Other" operating expenses, such as restructuring charges, workforce reduction expenses, asset impairments).

Operating Income was up 20.1 percent from last year's second quarter.  This impressive result can be attributed to the healthy increases in Revenue and Gross Margin.

Net interest and other non-operating items summed to income of $60 million, which was down substantially from $118 million last year.  Some of the decline is due to lower interest rates on the company's cash balances.

The 29.0-percent effective income tax rate was identical to the rate in last year's June quarter.


Given all of the above, Net Income rose by 14.6 percent. Diluted earnings per share increased 13.4 percent.



Full disclosure: No position in AAPL at time of writing.

NOK 2009-2Q Gauges

In our last post, we examined Nokia's (NYSE: NOK) Income Statement for the second quarter of 2009 and compared the figures to our "look-ahead" estimates.

We have since used Nokia's latest financial statements to update the ratios and other metrics with which we assess Cash Management, Growth, Profitability and Value.  This post reports on our analysis results, including the Financial Gauge scores.

Some background information about Nokia and the business environment in which it is currently operating can be found in the beginning of our look-ahead.


Nokia's latest quarterly results has produced the following changes to the gauge scores:

• Cash Management: 4 of 25 (unchanged from March)
  
• Growth: 1 of 25 (down from 2)
• Profitability: 10 of 25 (down from 11)
• Value: 8 of 25 (down from 17)

• Overall: 28 of 100 (down from 45)

Readers should be aware that Nokia's financial statements are prepared in accordance withInternational Financial Reporting Standards (IFRS), rather than U.S. Generally Accepted Accounting Principles (GAAP).  The Euro (€) is the currency used in these statements.  Also, Nokia isn't required to file 10-Q and 10-K reports with the SEC.

The rest of this post reviews the financial metrics that determine the gauge scores.

Cash Management	June 2009	March 2009	June 2008	5-yr Avg
Current Ratio	1.4	1.3	1.4	1.7
LTD/Equity	31.9%	21.4%	1.4%	2.2%
Debt/CFO (years)	2.9	2.3	0.2	0.3
Inventory/CGS (days)	29.3	29.4	28.0	25.7
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	82.0	74.7	66.0	57.3
Working Capital/Invested Capital	51.6%	47.4%	138.5%	265%
Cash Conversion Cycle Time (days)	40.2	40.6	33.9	27.9
Gauge Score (0 to 25)	4	4	5	10

The first thing we notice in the Cash Management data is Nokia's soaring debt.  Long-term debt increased from 1.4 percent of Equity to 31.9 percent in the last year, and it now would take 2.9 years of Cash Flow from Operations to pay off the company's Debt.  LTD increased from €169 million to €4.08 billion.  The second item that catches our eye is the surge in Days of Sales Outstanding, which indicates that Accounts Receivables have increased from 66 to 82 days of Revenue.  The amount of Accounts Receivable has been reduced, but Revenue is down much more proportionately.  The DSO surge might also signify Nokia is offering more generous payment terms to its customers.

The greater number of days of Inventory on hand, as a percentage of Cost of Goods Sold, is probably symptomatic of the soft sales environment. Inventory tends to accumulate when customers are buying less.  We find it useful for many companies to track the Finished Goods proportion of Inventory, but Nokia does not disclose this information.

Growth	June 2009	March 2009	June 2008	5-Yr Avg
Revenue growth	-19.0%	-12.1%	23.0%	10.1%
Revenue/Assets	124.1%	125.1%	166.9%	156%
Operating Profit growth	7.6%	15.7%	34.0%	10.1%
CFO growth	-71.4%	-61.2%	19.4%	7.0%
Net Income growth	-66.4%	-61.3%	2.0%	5.4%
Gauge Score (0 to 25)	1	2	9	11

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

The trailing-year Growth figures are all dismal.  The Operating Profit metric is a four-year average that should not change greatly from quarter to quarter; its plunge reflects the steepness of the current decline.

We should note, as a silver lining, Nokia's Net Income and Cash Flow remain positive.  The values are a small fraction of what they were last year, but they are greater than zero.

Profitability	June 2009	March 2009	June 2008	5-Yr Avg
Operating Expenses/Revenue	93.5%	91.4%	85.9%	88.2%
ROIC	28.6%	37.0%	112.7%	101%
Free Cash Flow/Invested Capital	14.4%	20.9%	120.9%	102%
Accrual Ratio	13.5%	10.2%	-3.6%	-0.3%
Gauge Score (0 to 25)	10	11	18	15

To some extent, the rising level of Operating Expenses, relative to Revenue, is due to non-recurring charges.  We also have to acknowledge that it would be unrealistic to expect Nokia to slash Operating Expenses immediately in response to the sudden drop in Revenue.  An information technology has to keep investing in innovation during cyclical downturns if it is to be ready for the future recovery.

The rising Accrual Ratio suggests poorer earnings quality.  There is less Cash Flow underlying the scanty net income.

Value	June 2009	March 2009	June 2008	5-Yr Avg
P/E	25.0	15.0	16.2	19.7
P/E vs. S&P 500 P/E	1.1	0.8	0.9	1.1
PEG	3.3	1.0	0.5	3.7
Price/Revenue	1.2	0.9	1.7	2.1
Enterprise Value/Cash Flow (EV/CFO)	26.7	15.2	12.5	18.3
Gauge Score (0 to 25)	8	17	15	6

The price of Nokia ADRs on 30 June 2009 was 40 percent less than on 30 June 2008.  The decline had been steeper through March, but the price actually rebounded 25 percent during in the second quarter.  While a lower share price would normally add lift to the Value gauge, the lift doesn't take effect when earnings and Cash Flow from Operations (see above) have plunged by greater amounts.  The Value gauge hits an air pocket when this happens.

Nokia's valuation ratios can be compared with other companies in the Communications Equipment industry.

Overall	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Gauge Score (0 to 100)	28	45	54	40

We incorrectly thought the gauge scores of Nokia were stabilizing after the first quarter of 2009; however, a disappointing second quarter (at the same time the price of Nokia ADRs was surging), took another big bite of the scores.

None of the four category-specific gauges have a score over 10 point (25 is the maximum for these gauges), and one of the four, Growth, is scraping the bottom.  The Overall gauge reflects this weakness.




Full disclosure: Long NOK at time of writing.

NOK: 2009-2Q Income Analysis

Nokia Corp. (NYSE: NOK) earned €0.10 per share in the second quarter of 2009, down from €0.29 last year. 

This post examines the Income Statement and compares its entries to our "look-ahead" estimates.  In a second article, we will report Nokia's scores as measured by the GCFR Financial Gauges.  The follow-up post will also provide the latest figures for the financial metrics we use to analyze Nokia's Cash Management, Growth, Profitability and Value.

Some background information about Nokia and the business environment in which it is currently operating can be found in the beginning of our look-ahead.


Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.





Nokia's financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), rather than U.S. Generally Accepted Accounting Principles (GAAP).  The Euro (€) is the currency used in these statements.  Also, Nokia isn't required to file 10-Q and 10-K reports with the SEC. 


Revenue in the June 2009 quarter was 24.6 percent less than last year's second quarter. We had estimated a 23 percent decrease.  Our estimate had assumed a 13 percent decline in the number of handsets sold and a 12 percent decline in the average price per unit sold.  In actuality, we were too optimistic on both counts: the volume decline was 15 percent and the price-per-unit decline was 16 percent.

The Cost of Goods Sold was 67.4 percent of Revenue in the quarter, which translates into a Gross Margin of 32.6 percent. The actual Gross Margin was slightly better than our 32-percent estimate.  However, it was a full percentage point weaker than the 33.6 percent in last year's second quarter.

Research and Development (R&D) expenses were 16 percent greater than we expected.  Much of the difference can, however, be attributed to a €135 million charge for amortization of acquired intangible assets.  If the charge is excluded, R&D expenses were only 5.3 more than our target.

The situation was similar with Sales, General, and Administrative (SG&A) expenses, which were a very disappointing 9.4 percent more than our target.  However, the figure with special charges excluded almost exactly matched our target. 

"Other" operating expenses (e.g., restructuring charges, workforce reduction expenses, asset impairment) were half what we expected.  Our estimate was made by averaging the charges recorded in the last 10 quarters, excluding the highest and lowest values.

Operating Income was 71 percent lower than in last year's second quarter.  We had estimated that Operating Income would be 52.5 percent less.

The non-operating figures were better than our estimates.  For example, the net interest expense was only 60 percent of our €100 million target.  We were generous in our estimate because Nokia has taken on more debt.

Unlike the first quarter, Nokia actually had to make a provision of income taxes in the second quarter.  The 24.5 percent effective tax rate was less burdensome than our 26 percent estimate.

Minority interests contributed €68 more than our €25 million estimate.

The bottom line Net Income "attributable to equity holders of the parent" was 65.5 percent less than in June 2008 quarter.  We had expected a 57.5 percent decline.


In summary, it was widely expected that Nokia's second-quarter results would be worse than last year's, but the actual results were still disappointing.  The Revenue shortfall was relatively minor, and within the margin for error, but there's nothing comforting to be found in lower mobile device volumes, selling prices, and market share.

In the second quarter, only 5.4 percent of Nokia's sales were in North America.  Yet, this was the only region that showed a sales increase.

The silver lining, if there is one, is that the results of the second quarter were weighed down by substantial, non-cash charges that related to the formation of Nokia Siemens Networks and the acquisition of Navteq.


Full disclosure: Long NOK at time of writing.

INTC: 2009-2Q Gauges (Preliminary)

In a previous post, we examined Intel Corporation's (NASDAQ: INTC) Income Statement for the second quarter of fiscal 2009 and compared the figures on it to our "look-ahead" estimates.

This post provides the latest figures for the various financial metrics we use to analyze Intel's financial strength, performance and value.  It also reports Intel's scores on our Financial Gauges.

Some background information about Intel and the business environment in which it is currently operating can be found in the beginning of our look-ahead.

After digesting the data in the latest quarterly report, Intel's gauge scores are now:

• Cash Management: 13 of 25 (up from 10 in March)
  
• Growth: 0 of 25 (unchanged)
• Profitability: 6 of 25 (down from 8)
• Value: 3 of 25 (down from 7)

• Overall: 22 of 100 (down from 30)

If the European Commission had not fined Intel $1.447 billion, the Profitability gauge would have remained at 8 points, the Value gauge would only have slipped to 5 points, and the Overall gauge would be 27 points.

Because the press release did not include a complete Cash Flow statement, we had to estimate certain values.  We will adjust the gauge scores after Intel files a 10-Q report with the SEC.

Cash Management	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
Current Ratio	2.6	2.9	2.5	2.5
LTD/Equity	3.0%	3.0%	4.7%	4.0%
Debt/CFO (years) (*)	0.2	0.1	0.2	0.2
Inventory/CGS (days)	69.6	71.2	74.6	74.3
Finished Goods/Inventory	43.2%	40.0%	40.7%	36.9%
Days of Sales Outstanding (days)	23.5	25.0	22.5	30.2
Working Capital/Invested Capital	39.8%	39.8%	38.6%	45.0%
Cash Conversion Cycle Time (days)	44.7	50.5	48.8	57.0
Gauge Score (0 to 25)	13	10	15	11

* Based on an estimate of Cash Flow in 2009-2Q.

Despite the weak economy, Intel's Balance Sheet remains strong and liquid.  Debt is insignificant, and working capital is high. 

The most substantial change to the Cash Management metrics in the June quarter is the reduction in the CCCT, which indicates more efficient use of cash. The lower ratio of Inventory-to-CGS is part of the efficiency improvement, and it is probably due to the more favorable sales environment.

The increase in the Finished Goods ratio is puzzling in this regard because it would normally decrease when sales are more rapid than management expected.  It would be interesting to determine if sales of one segment of the product line were especially weak.

Growth	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
Revenue growth	-15.9%	-10.5%	11.1%	-1.5%
Revenue/Assets	66.3%	68.8%	77.8%	75.2%
Operating Profit growth	-0.3%	-0.9%	9.1%	-1.6%
CFO growth (*)	-48.5%	-31.6%	24.2%	-10.5%
Net Income growth	-65.1%	-34.0%	24.3%	-14.9%
Gauge Score (0 to 25)	0	0	18	9

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
* Based on an estimate of Cash Flow in 2009-2Q.

While the Revenue decline wasn't as bad as forecast for the second quarter, this situation is not equivalent to Growth.  The Cash Flow rate, which is an estimate, and the Net Income growth rates were adversely affected by the $1.45 billion fine.

Profitability	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
Operating Expenses/Revenue	78.7%	77.2%	74.2%	75.9%
ROIC	15.9%	19.8%	23.2%	22.9%
Free Cash Flow/Invested Capital (*)	4.7%	11.2%	30.0%	7.8%
Accrual Ratio (*)	-1.3%	-0.2%	0.6%	7.9%
Gauge Score (0 to 25)	6	8	21	12

* Based on an estimate of Cash Flow in 2009-2Q.

The increase in the Operating Expense ratio and the lower ROIC are not the result of special expenses.  These changes reflect the inefficiencies that result when Revenues are down.   We will need to take another look at the Cash Flow values when the 10-Q is published.

Value	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
P/E	37.4	18.9	17.5	19.4
P/E vs. S&P 500 P/E	1.7	1.0	1.0	1.2
PEG	#N/A	#N/A	1.9	1.6
Price/Revenue	2.8	2.4	3.1	3.5
Enterprise Value/Cash Flow (EV/CFO) (*)	11.7	8.3	8.4	26.4
Gauge Score (0 to 25)	3	7	10	10

* Based on an estimate of Cash Flow in 2009-2Q.

The EC fine took a big bite out of earnings, which makes the Intel's appear overvalued.

Intel's valuation ratios can be compared with other companies in the Semiconductor industry.

Overall	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
Gauge Score (0 to 100)	22	30	61	43

Intel staged a rebound in the second quarter that was more robust than expected.  When compared to the March period, Revenue was up 12 percent and the Gross Margin rose from 45 to 51 percent. 

However, the gauges were still under pressure.  This was due mostly to poor comparisons with last year's second quarter, but the $1.45 billion fine from the Europeans for antitrust violations trimmed 5 points from the Overall score.




Full disclosure: Long INTC at time of writing.